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BNZ Daily Markets Wrap and Strategy

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Fuseworks Media
Fuseworks Media

NZD

The NZD benefitted from a mild USD sell-off on Friday, rising 0.2% against the USD to 0.8330.

Very little report from the local session on Friday. The only local data was the Q2 wholesale trade figures, which rose by 1.8% q/q, higher than we had expected (no formal poll). While the market did not budge, this number feeds into our pick for Q2 GDP, due next week. We are picking a 1.0% q/q rise, for an eye-watering annual gain of 4.2% q/q.

This morning GBP sell-off (see Majors) has NZD/GBP 0.7% stronger at 0.5140, reversing the trend decline in the cross seen since early July. The risk is that this move could extend, heading into the Scottish referendum (18 Sept). We expect the cross to fall to 0.49 by year-end, with our forecasts based on Scotland remaining part of the UK.

The sharp uptick in investor caution with regard to Scotland reminds us as that political risk is very much alive and well in currency markets. This is relevant for the NZD heading into our own General Election. We would expect (milder) downward pressure on the currency, should the polls continue to tighten.

This week, the RBNZ meeting will be the local highlight. We expect the Bank to strike a less hawkish tone, while attempting to convince investors it remains committed to normalising the OCR. This should keep downward pressure on the NZD.

Majors

The USD gave back some of its gains on Friday, after US labour market disappointed. Equities benefitted from a ceasefire declared in the Ukraine. A fresh poll shows Scotland is moving closer to independence, which weighed on GBP at the open this morning.

US non-farm payrolls grew at just 142k in August, with downward revisions over June and July making it a decidedly soft reading. The unemployment rate dipped to 6.1% as expected, but that was flattered by a 0.1% rise in the participation rate to 62.9%.

The fall-out from the weaker-than-expected outturns was very limited, with both the narrow US Dollar Index and the broader Bloomberg Spot Index losing just 0.1%. Analysts generally pushed back against the notion that this would derail a Fed looking to balance its language (from dovish) at next week’s FOMC meeting. We expect the USD to consolidate (if not build) on its gains heading into that meeting.

In the Ukraine, the Kiev government and pro-Russian separatists agreed to a ceasefire on Friday. Despite reports of sporadic outbreaks of fighting, it looks to be holding. Bloomberg reports that both sides agreed to hold their fire, exchange prisoners and allow access to supply convoys (from Russia) to the Donetsk and Luhansk regions. There is no agreement as yet on the retreat of Russian or Ukrainian forces, or the disarmament of ‘volunteer’ battalions on either side. The immediate fate of the plan to step up sanctions against Russia as agreed in principle by Western powers last week is currently unclear. This news helped to stem a slide in European equities. The Euro Stoxx 50 closed effectively unchanged, after being 0.5% lower earlier in the session.

Over the weekend, the UK Sunday Times published a new YouGov opinion poll ahead of the Sept 18 referendum on Scottish independence. Excluding undecided voters, this shows the ‘Yes’ camp (pro-independence) support at 51%, with 49% for the ‘No’ camp. This weighed heavily on GBP at the open this morning, opening 0.9% lower at 1.6180. This reflects investors pricing in significant economic and political uncertainty, including the thorny issue of whether an independent Scotland would retain the GBP. All the major political parties in London said that it would oppose that motion. The pro-independence camp says it would refuse to pay its share of the UK national debt if it did not get to retain the GBP.

This week ahead is set to be much more staid, after last week’s fireworks. In our neck of the woods, Australia’s labour market report will be of intense interest, given last month’s jump from 6.1% to 6.4%. We also have China’s monthly data scattered through the week, kicking off with trade data today.

Further afield, industrial production data for the UK and the euro-zone will be highlights (speaking to the relative dreariness of the week). In the US, the U of Michigan survey and retail sales are due. Largely, though, we expect the USD to be fairly range-bound ahead of the FOMC next week.

Fixed Interest

NZ interest rates largely took their cues from the offshore set on Friday, with the longer end of the curve rising in line with the 5bp increase in US 10-year Treasury yields. The NZ 10-year swap yield rose by 3bps to 4.68%. The 2-year swap yield was unchanged at 4.08%.

The short-end of the NZ curve continues to be anchored by expectations of a softer line being taken by the RBNZ at this week’s meeting. We expect the RBNZ to keep the OCR on hold on Thursday, and expect communication to reflect that the Bank will be on an extended pause. We see the next hike in March 2015, with the OCR eventually rising to 4.75% in early 2016 (from 3.50% today). Even after adjusting our track lower last week, we consider the skew of risks to our view still favouring a lower OCR track.

Global bond yields were little changed on Friday night, with the bias still for higher yields. The US 10-year Treasury yield was 1bp higher at 2.46%

Other news: -Canadian employment change -11k vs +10k exp. -German industrial production +1.9% m/m vs +0.4% exp.

For other BNZ research, such as the Markets Outlook and the Economy Watch, please go to www.research.bnz.co.nz.

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